A pair of factor ETFs are on a hot streak that should continue early in the new year, according to Bank of America. ETF strategist Jared Woodard said in a note to clients on Monday that funds focusing on quality stocks should continue to outperform in coming months, and named the Pacer US Cash Cows 100 ETF (COWZ) and the FlexShares US Quality Low Volatility Index Fund (QLV) as his favorite funds in this group. “COWZ is our top pick with a gold-standard free cash flow yield screen. QLV has high exposure to our analysts’ preferred sectors & stocks, resulting in high risk adjusted returns,” Woodard wrote. Factor investing is a strategy based on using data from financial statements to identify large groups of stocks with similar profiles. Free cash flow to enterprise value is the best metric for determining quality, Bank of America said. Stocks that score highly in that metric have been outperforming the S & P 500 by about 7% annually since 1992, the note said. Both of the funds identified by Bank of America topped the S & P 500 last year, and have continued to outperform even as the market has recovered off its October lows. After the first week of the year, the COWZ fund has a total return of 8.2% over the past three months, while the QLV fund is up 7.8%. The funds have net expense ratios of 0.49% and 0.22%, respectively, according to FactSet. COWZ 3M mountain The Cash Cows ETF has been hot over the past eight months. Even with that outperformance, the funds still look cheap on a historical price-to-earnings basis. Both funds “trade well below their average P/E, suggesting that there is still time to rotate into quality at an attractive price,” Woodard wrote in the note. “COWZ has a top weights in energy and materials, where P/E ratios have come down from summer highs and remain below average. Similarly, QLV has high weights in Apple and Microsoft whose P/E ratios have both returned to pre-Pandemic levels,” he added. Some of the biggest positions in the COWZ fund are chemical manufacturers Dow and LyondellBasell , while Microsoft and Johnson & Johnson are the biggest holdings in QLV, according to FactSet. — CNBC’s Michael Bloom contributed to this report.
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